Mastering Technical Analysis—Methodology Summary

Common Misconceptions About Technical Analysis

When first entering the trading market, many newcomers assume that drawing a few trendlines, recognizing chart patterns, and memorizing candlestick formations are enough to make consistent profits. Traders who think this way are often harshly corrected by the market, usually ending up with substantial losses. At the root of this lie three major misunderstandings:

• Ignoring the true nature of the market and trading

Understanding what the market really is forms the foundation for survival and profitability. It is also the core of developing one’s trading philosophy and strategy.

The market is essentially a place where wealth is redistributed. Price movements are driven by human behavior, and every price you see is the outcome of constant competition between buyers and sellers.

At its core, the market is ruled by human emotions. Its only true certainty is uncertainty. Randomness and volatility are its defining characteristics. Multiple forces are always at play, and prices are influenced by policy changes, news, capital flows, and market sentiment. In the short term, prices appear chaotic and random; in the long term, they show recurring patterns and evolve in trends.

Only by understanding the essence and underlying dynamics of the market can traders build effective trading philosophies, strategies, systems, and mindsets. Without this foundation, traders easily become inconsistent, fall into theoretical traps, or behave impulsively.

• Blindly using technical analysis to pick tops and bottoms while ignoring timeframes

Markets operate across multiple timeframes—5-minute, 15-minute, hourly, daily, weekly, and so on. As a rule, higher timeframes dominate lower ones. If the trend on a larger timeframe hasn’t ended, the smaller timeframe won’t meaningfully reverse either. Many traders try to capture tops and bottoms on lower timeframes in pursuit of maximum profit, but they often get trapped halfway through a move. Attempting to pick tops and bottoms without considering the broader timeframe is essentially acting blindly. Trends that are confirmed across multiple timeframes are significantly more reliable.

As long as the larger timeframe shows no clear reversal signal, we should assume the trend will continue.

Historical trading data shows that trend-following yields far more profit than trying to capture small swings in a range. One of the greatest values of technical analysis is precisely this: identifying trends and staying with them.

• Treating a single indicator as a universal analytical and predictive tool

No single technical indicator works across all market conditions. Trend indicators include Bollinger Bands, ADX, and moving averages. Oscillators include RSI, KDJ, ROC, and CCI. Many beginners fail to recognize the specific conditions in which each indicator is effective, which often leads to significant losses.

Experienced traders combine multiple indicators and tools to form their own analytical framework, enabling them to adapt to different market environments.

In summary, technical analysis is not a one-size-fits-all tool. It varies from trader to trader. Financial markets inherently balance risk and reward. Most failures stem not from the tools themselves, but from traders taking on excessive risk or misusing those tools without understanding the broader context.

Theoretical Foundations of Technical Analysis

Technical analysis is built on three core assumptions:

1. Market action discounts everything.
2. Prices move in trends.
3. History repeats itself.

Technical analysis identifies recurring patterns and regularities through charts. In other words, as long as price movements exhibit consistent behavior, technical analysis remains valuable. Among the three assumptions, “history repeats itself” is the most critical.

Why does history repeat itself?

To answer this, one must understand the relationship between price, behavior, and psychology. Price is merely the surface; it reflects the underlying behavior of buyers and sellers. Behavior is shaped by psychology—primarily fear and greed. Collective behavior patterns and shared psychological tendencies manifest in price action, creating observable regularities.

These patterns allow technical analysis to respond more directly to market conditions. Traders can identify support and resistance levels to determine entry and exit points, using daily, weekly, and monthly charts for analysis from different perspectives. This approach serves both long-term and short-term traders, enabling them to find suitable trading opportunities.

Charles H. Dow created the first stock market average price index on July 3, 1884, comprising 11 stocks, 9 of which were railroads. By 1897, this original index evolved into two: a 12-stock industrial average and a 20-stock railroad average. The industrial index expanded to 30 stocks by 1928, and the utility average was added in 1929. Although countless new indices have been introduced since, they all trace their origins to Dow’s pioneering work.

Technical analysis has over a century of history and has continually evolved. In the crypto market, technical analysis borrows from mature stock market methodologies while adapting to the unique behavior of crypto assets.

Why emphasize this background? Because the most widely used technical analysis theories today are derived from Dow Theory. Charles Dow is widely recognized as the founding father of technical analysis.

Main Schools of Technical Analysis

Technical analysis is commonly divided into five main categories:

• The Indicator School

The indicator school considers multiple aspects of market behavior, using mathematical models to produce numerical values—called indicators—that reflect underlying market conditions. The actual values and their relationships provide guidance for trading decisions. Many insights revealed by indicators are not immediately visible from raw price charts.

Common indicators include VOL, MACD, KDJ, RSI, and MA. They are generally categorized as trend indicators, oscillator indicators, or momentum indicators.

• The Trendline School

The trendline school focuses on drawing straight lines on price charts according to established principles, then inferring future price movements based on these lines.

The accuracy of the drawings directly affects the quality of predictions. Commonly used lines include trendlines, channels, Fibonacci retracements, Gann lines, and angle lines. These tools are the result of long-term study and refinement, and traders have benefited significantly from their application.

• The Chart Pattern School

By observing price patterns, traders can infer the broader market context, guiding future trading behavior. Classic patterns include M-tops, W-bottoms, and head-and-shoulders formations, among others. These patterns represent the accumulated wisdom of generations of traders.

• The Candlestick School

The candlestick school focuses on the combinations of multiple days’ candlesticks to assess the relative strength of buyers and sellers.

Single-day candlestick patterns have dozens of variations, while multi-day combinations are nearly limitless. Over time, traders have identified combinations that offer practical guidance for buying and selling, and new patterns continue to be discovered and applied.

• The Elliott Wave School

Wave theory originated with the 1978 publication The Origins of Wave Theory by Charles J. Collins in the United States. The theory was actually conceived by Ralph Nelson Elliott in the 1930s.

Wave theory views price movements—both upward and downward trends over various periods—as a series of waves. These waves follow natural rhythms, and market prices tend to follow the same cyclical patterns.

In simple terms, an upward trend usually consists of five waves, while a downward trend has three waves. By correctly counting the waves, traders can anticipate market tops and bottoms, including the end of a decline or the onset of a bull market.

Compared to other technical analysis schools, the Elliott Wave school’s biggest advantage is its ability to forecast tops and bottoms well in advance. However, wave theory is widely regarded as the most challenging technical analysis method. Large waves contain smaller sub-waves, and miscounting is common. In backtesting, counting waves retrospectively usually aligns with the theory, but in real-time trading, very few traders can accurately identify waves consistently.

These five technical analysis approaches examine the market from different perspectives. Some have a solid theoretical foundation, while others are less clearly grounded, making their rationale harder to explain. Yet they share a common characteristic: all have been tested in real-market conditions and survived. They represent the distilled experience and wisdom of previous generations of traders.

Although these methods approach the market differently, their ultimate goal is the same. They are not mutually exclusive and can complement each other in practice. For example, when performing indicator-based analysis, traders often incorporate insights or techniques from trendline and chart pattern analysis.

The differences in approach also lead to differences in practical guidance. Some methods emphasize long-term trends, while others focus on short-term movements. Some prioritize relative price positions, while others emphasize absolute levels. Some consider timing more than price, while others do the opposite. Regardless of the focus, the ultimate aim is the same: generating consistent profits. The specific method used is secondary to its effectiveness.

How to Find a Method That Suits You

1. Build a solid theoretical foundation The Dow Theory, as the cornerstone of technical analysis, is essential. Reading and thoroughly understanding this classic work determines how far technical analysis can take you in trading. Practical trading experience sets the floor for your potential profits, while your ability to learn theory sets the ceiling.
2. Understand the nature of trading and human weaknesses The essence of trading has been discussed earlier. To survive and consistently profit in the highly competitive market, mastering trading techniques is not enough—emotional control and mindset are crucial. The longer you trade, the more you appreciate the importance of psychology. Recognizing human weaknesses, respecting the market, and knowing when to act—or not—are key to sustainable success.
3. Learn through practice, review, and refinement Beyond theoretical study, immersing yourself in the vast world of futures trading and consistently reviewing your trades helps identify the limitations of both technical analysis and yourself. This process improves the accuracy and effectiveness of your trading system.
4. Build and refine your own trading system A robust trading system involves scientific position sizing, risk management, and well-defined strategies. By testing and refining the system through real trading, you can gradually develop a personalized, advanced approach that suits your style and objectives.

Lesson Summary

This course, “Mastering Technical Analysis—Methodology Summary,” condensed the essence of classical technical analysis, covering candlesticks, trends, and chart patterns. By distilling these methods and focusing on their practical application, traders can build a structured understanding of the market and make informed decisions in futures trading.

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Disclaimer

This article is for reference only. Information provided by Gate does not constitute investment advice and Gate is not responsible for your investment decisions. Technical analysis, market judgment, trading strategies, and trader insights may involve potential risks, investment variability, and uncertainties. Nothing in this article guarantees returns or implies risk-free opportunities.